Technical Analysis

Index outlook: The market takes a breather

Lokeshwarri SK | Updated on November 19, 2014 Published on June 14, 2014

Spike in crude oil prices and profit booking can cause a temporary halt in the rally

The benchmark indices appear to have lost steam after the thundering rally that took the Sensex beyond 25,000 and the Nifty above 7,500 in recent weeks. The indices trudged sideways in a listless manner at higher levels in the early part of the week before escalating tension in Iraq sent them scuttling lower.

Pandemonium prevailed in the currency and commodity markets too on Friday as crude oil prices spiked higher and the rupee went skidding lower. But despite the intense sell-off on Friday, the undertone in the equity market stays bullish, leaving open the possibility of sudden pull-backs.

Progress of the events in Iraq will be closely tracked by market participants next week. Despite the US and European markets brushing off the event nonchalantly, our dependence on imported crude makes us especially vulnerable to these events.

Investors could also turn cautious as the date of the Union Budget of 2014 draws near. With the continuation of this rally in the near term hinging on the proposals to be announced in the budget, some might want to take money off the table.

The Federal Open Market Committee meeting scheduled for Tuesday and Wednesday will also be of relevance to investors. If the Fed decides to reduce the quantum of reduction in its bond repurchase program — currently at $10 billion per month — it will give an additional fillip to equity markets.

Economic data released last week were positive. Exports growth for May was strong, and trade deficit moved lower. Reduction in the consumer price inflation was another positive.

But with monsoon till June 11, 44 per cent below the long period average, the fear of inflation escalating again remains open. And we are yet to see the extent of damage that El Nino can do this year. Volume in the cash segment was strong while derivative volume was more subdued.

FIIs were net buyers in equity through last week. The sell-off on Friday has caused a sell signal in extreme short-term indicators. But they continue to feature in the bullish zone implying that the short-term view has not turned negative yet.

Oscillators in the weekly chart are however continuing in the overbought zone. As explained earlier, the indicators can move into overbought zone but continue to remain there for extended periods in strong secular rallies.

Sensex (25,228.1)

The Sensex moved in the range between 25,300 and 25,700 before giving way on Friday.

The week ahead: The index is now close to its short-term support at 25,160. If this level holds in the early part of the week, there can be a rally to 25,735 and 26,142. A close above 26,000 will be a psychological victory for the bulls and will speed the index to 26,743 or 26,959.

Supports for the week will be available at 24,784 and 24,163. Short-term view will turn negative only on a close below 24,784.

The medium-term: The medium-term trend for the index stays positive. This view will be threatened only on a close below 24,400.

As indicated last week, investors need to exercise caution till the index makes a strong break above 25,500. Next medium-term target is at 26,956 and then 27,140.

Nifty (7,542.1)

The extreme short-term trend in the Nifty too has reversed lower.

The week ahead: The Nifty has immediate support at 7,478 and 7,313. Traders can play long, as long as the index trades above the first support. The short-term view will turn negative only if the index closes below the second support.

If the index manages to hold above 7,471, it will move higher to 7,683 or 7830 in the coming sessions. Sharp move beyond 7,800 will mean that the index can move on to 8053.

The medium term: We retain a positive medium-term view for the Nifty. But the index will be able to make headway only if it breaks beyond 7,600. Next medium term target is 8,071. Key medium term support exists at 7,051.

Global cues

Global indices continued to coast higher last week. The tension in Iraq did not effect equity market though crude prices spiked higher to $108. Nervousness among traders rose, reflected in the CBOE volatility index spiking above 12.5. But medium-term view in the index will stay positive as long as it trades below 15.

European indices continue to be bullish and the DJ Euro STOXX 50 managed to hold on to higher levels.

A strong breach of the 3,000 level is needed to make the long-term view negative in this index. The Dow also put up a brave show on Friday, managing to reverse from its intraday low at 16,718.

Key short-term support for the index is at 16,600. The medium-term support that needs to hold is 16,340.

The movement of the index this week needs to be watched to determine the medium-term trajectory. The inability to move above the recent high at 16,970 will mean that a deeper correction could be setting in. Next target above 16,970 is 17,091.

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